Skip to main content
Article thumbnail
Location of Repository

Financial Liberalization and Credit-Asset Booms and Busts in East Asia.

By Panicos O. Demetriades

Abstract

This paper presents econometric evidence that sheds new light on the role played by financial liberalization in the Korean and Thai financial crises. Drawing on previous empirical studies, it argues that while the banking systems of both Korea and Thailand supported their remarkable long-run growth performance, they were ill prepared to face the risks emanating from financial liberalization. New evidence is then presented which shows that financial liberalization set in motion a classic credit-asset boom and bust cycle in Thailand and created other weaknesses in the Korean financial system, which made both economies vulnerable to the sentiments of foreign investors and lenders. When capital flows were reversed, the ensuing liquidity crisis triggered a bust that was further magnified by currency depreciations and interest rate hikes. \ud \ud In the light of this analysis, the paper argues that besides strengthening prudential regulation and accounting standards, there is a need for upgrading management systems and expertise to deal with financial risks and an important need for a more widespread appreciation of the risks associated with financial liberalization. Furthermore, there remain gaps in the international financial architecture that need to be addressed, such as the absence of an effective international lender of last resort. Given that these weaknesses may require a long time to address, it is argued that in the interim period financial restraints can act as a relatively cheap, effective and transparent safety device in safeguarding financial stability

Publisher: Dept. of Economics, University of Leicester
Year: 1999
OAI identifier: oai:lra.le.ac.uk:2381/4341

Suggested articles

Citations

  1. (1979). A M odel of Balance of Payments Crises”, doi
  2. (1993). A Simple Estimator of Cointegrating Vectors doi
  3. (1996). Bank Insolvency: Bad Luck, Bad Policy or Bad Banking?”, W ashington D.C.: W orld Bank.
  4. (1997). Credible Economic Liberalizations and Overborrowing",
  5. (1996). Does Financial Development Cause Economic Growth? doi
  6. (1988). Financial Crises: The Lessons of Asia”, doi
  7. (1997). Financial Development and Economic Growth: assessing the Evidence”, doi
  8. (1999). Financial Liberalization: The Experience of Developing Economies”, doi
  9. (1998). Financial M arkets and Economic Development”
  10. (1999). Financial Policies and the Average Productivity of Capital: Evidence from Developed and Developing Economies”, paper -25-presented at the M oney, M acro and Finance Annual Conference,
  11. (1996). Financial Repression in the South Korean M iracle”, paper presented at Econometric Society European M eeting
  12. (1985). Good Bye Financial Repression Hello Financial Crash" doi
  13. (1994). Long-Run Structural M odelling" doi
  14. (1995). M oney, Interest and Banking
  15. (1989). orld Development Report: Financial Systems and Development,
  16. (1998). Productivity and Financial Sector Policies: Evidence from South East Asia”, doi
  17. (1999). Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture”, doi
  18. (1992). Some Structural Hypotheses in a M ultivariate Cointegration Analysis of Purchasing Power Parity and Uncovered Interest Parity for the UK",
  19. (1998). Sound Finance and Sustainable Development in Asia", Keynote Address to the Asian Development Forum,
  20. (1988). Statistical Analysis of Co-Integrating Vectors",
  21. (1999). Supervisory Lessons to be Drawn from the Asian Crisis”,
  22. (1998). The Asian Liquidity Crisis”, Federal Reserve Bank of AtlantaW orking
  23. (1997). The Direct Costs of Financial Repression: Evidence From India”, doi
  24. (1999). The Hazard of M oral Hazard: Untangling the Asian Crisis”, forthcoming:W orld Development. doi
  25. (1998). The Onset of the East Asian Financial Crisis”, mimeo: doi
  26. (1991). The Order of Economic Liberalization: Financial Control in the Transition to a M arket Economy, Baltimore and London:
  27. (1994). The Relevance of P-Star Analysis to UK M onetary Policy",
  28. (1999). The Return of Depression Economics, doi
  29. (1994). The Role of the State in Financial M arkets”,
  30. (1999). The South Korean Financial Crisis: Competing Explanations and Policy Lessons for Financial Liberalization”, doi
  31. (1995). The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience”, doi
  32. (1999). Thoughts on the Origins of the Asian Crisis: Impulses and Propagation M echanisms”, doi
  33. (1999). Unproductive Credit and the South Korean Crisis”, paper presented at Econometric Society European M eeting 1999, Santiago di Compostella,
  34. (1993). Vector Autoregressions and Causality", doi
  35. (1998). W hat Happened to Asia?”, http://webm it.edu/krugm an/www/disinter.htm l.
  36. (1999). W hither Thailand”
  37. (1993). W ickens

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.